EXAM PRACTICE QUESTIONS 3 Flashcards
Denay and Althea, both aged 64, have been married for 35 years and have two dependent adult children. They are looking forward to retiring and meet with you to review their current financial situation. Denay has been the sole income earner for their household for many years, and she believes they have enough to live off comfortably if she retires this year. The family’s financial needs are the same if either of them passed away, as it is when they’re both alive. The majority of their assets are in Denay’s defined benefit pension plan (DBPP) with survivorship benefits.
What is the appropriate percent of income they should consider purchasing permanent insurance on Denay for, if any?
a) 40%
b) 0%
c) 100%
d) 15%
Pension legislation requires that a plan must provide between 60% to 66% of the pension to the surviving spouse. As such, permanent life insurance equaling 40% of the income created by Denay’s DBPP is the only appropriate percentage to suggest since Althea would require 100% of the previously received income.
[Ref: 10.2.3]
Monica was born on April 5th, 1970. She bought $400,000 5-year renewable and convertible insurance policy on August 12th 2011, when she was 41 years old. Monica renewed the policy in 2016, and she decided to convert the policy on June 23rd 2020. Her converted permanent life insurance premiums were based on her attained age as of her last birthday. Identify Monica’s age based on which the premiums were calculated after conversion.
a) 50
b) 41
c) 51
d) 46
Attained age is the age on which the life insurance premiums are based. Depending on the administrative policy of the insurance company, attained age may be considered to be the age of the life insured as of his last birthday, his next birthday, or his nearest birthday. Depending on the convertible policy, the premiums for permanent life insurance upon conversion may be based on the attained age of the life insured at the time of the conversion to the permanent policy. This is called an attained-age conversion. In this case, Monica’s permanent life insurance premiums were based on age 50, her attained age on June 23rd 2020, which is based on her last birthday, which would be April 5th, 2020.
[Ref: 2.6.2]
Sometimes mistakes are made when filling out life insurance applications. The gravity of the mistake depends on whether the wrong information is a material fact for underwriting purposes or if it is not considered material. Which of the following mistakes is NOT material and LEAST likely to impact the underwriter’s evaluation?
a) When asked when she last saw her doctor, the applicant did not mention she saw her doctor two months ago to get the influenza vaccine.
b) When asked if she had any symptom for which she did not consult a doctor, the applicant did not mention her frequent migraines over the last month.
c) When asked if her medication changed in the last two years, the applicant answered “no” even though her dosage was increased six months ago.
d) The application mistakenly indicated her year of birth as 1987 when she was in fact born in 1978.
The fact that the applicant saw her doctor to receive a flu vaccine is not considered a material fact since an influenza vaccine does not affect the risk of death of the applicant.
Not disclosing frequent migraines that she suffered over the last month, and for which she did not yet consult a doctor, is material as the cause of the migraines could impact the risk of death of the applicant.
Recent changes in medication are also considered material, as it can be an indication of deteriorating health. The reasons behind the change in medication will have to be explored to properly assess the risk of the life insured.
A difference of nine years in the DOB is material because the risk of death is different for someone born in 1978 compared to 1987.
(Refer to Section 9.2.4.1)
Joshua is traveling to Europe this summer. He wants to take the appropriate precautions to minimize any losses should there be any circumstances that would affect his trip. Joshua’s mom has been ill, and he is worried that he will need to return home, forfeiting his trip and incurring additional expenses. Joshua has purchased insurance that would allow him to recover his costs and return home if needed. He has also added a $250 deductible to bring down the cost of the premiums. Identify the statement that best describes the risk management strategy that Joshua has implemented.
a) Joshua has transferred the risk by purchasing an insurance policy
b) Joshua has retained the risk by adding a deductible
c) Joshua has transferred the risk by adding a deductible
d) Joshua has reduced the risk by purchasing an insurance policy
“Risk Transfer” means finding someone else who is willing to assume the consequences if the risk is realized. Insurance is a risk transfer strategy, and therefore Joshua has transferred the risk by purchasing insurance. He is still taking the trip, so he is not avoiding, reducing, or retaining the risk.
[Ref: 1.3]
Nabeel is concerned about his family’s future should he die prematurely. He recently immigrated to Canada and his budget is limited.
What factors will be used to determine the cost of Nabeel’s life insurance?
a) Age of the policy owner and nationality of the life insured
b) Age of the life insured, medical information, and gender
c) Age of the policy owner, gender, and marital status
d) Age of the life insured, income level, and dependants
In Canada, insurers use the age of the life insured, medical information including family medical history, and the gender of the life insured to determine the cost of insurance.
(Refer to Section 2.4.1.1)
Samantha has permanent insurance needs. While the affordability of the premiums is currently not an issue, she is worried that when she retires she may have more difficulty paying her insurance premiums because she anticipates her annual income will be lower.
If Samantha buys a participating whole life insurance, which dividend payment option will NOT alleviate her concern?
a) Accumulation
b) Term insurance
c) Cash
d) Premium reduction
Samantha’s concern is that due to reduced income during retirement, it will be harder to pay her insurance premiums. The cash dividend option would help replace some of that lost income, helping her to afford the premium. Obviously, the premium reduction option reduces the premium, making it more affordable each year. The dividends that are accumulated can be withdrawn at any time and could help replace part of the lost income.
The term insurance dividend option does away with the premium, but it does not offer the cash that can help replace lost income. This option converts a permanent insurance policy into a term policy. It may, therefore, expire and not pay benefits if she lives longer than the term insurance coverage. Therefore, this option would not alleviate Samantha’s concern.
(Refer to Section 3.4)
Niraj and Ria are a married couple. Niraj is a new employee at a company where he is enrolled in a group plan. Ria’s health status is good, but she has no insurance coverage. Niraj has 60 days to obtain dependant coverage for Ria under his group plan. He wants to know if he should obtain an individual single life policy for Ria instead of dependant coverage. He is looking for a cost-effective option. Which of the following is true?
a) Niraj should opt for an individual life policy for Ria as premiums will be lower than dependant coverage.
b) Niraj should opt for dependant coverage for Ria as premiums will be lower than the individual life policy.
c) Niraj should opt for dependant coverage for Ria as she can obtain coverage without providing evidence of insurability.
d) Niraj should opt for the individual life policy for Ria as she can obtain coverage without providing evidence of insurability.
Niraj should opt for an individual life policy for Ria as premiums will be lower than that of dependant coverage. Most group life insurance plans give members the option of buying life insurance coverage on their dependants. As long as they place this coverage within a short time of joining the plan (e.g., 60 days), they will not have to provide proof of insurability for those dependants. The principal of adverse selection applies because dependant coverage is optional. A member is more likely to take advantage of the dependant coverage if that dependant is a poor insurance risk. As a result, premiums for dependant coverage are often higher than premiums on an independent single life policy.
[Reference: 6.3]
Nupi took out a substantial sized participating whole life insurance policy twenty-five years ago for estate planning purposes. Her dividend option was always “paid-up additions”. Today, she read in a news article that there are other dividend options and would like to meet with you to discuss her other dividend options. Which of the following is not a dividend option for Nupi to choose from, for this product type?
a) Additional deposit option
b) Cash
c) Purchasing term insurance
d) Premium reduction
The most typical dividend options for participating whole life insurance policies are cash, premium reduction, accumulation, paid up additions and to purchase one-year term insurance in increments. An additional deposit option, sometimes referred to as a “plus premium”, is not a dividend option.
[Ref: 3.4]
Kartik, age 45, has a poor family health history and is generally not in good health currently. His insurance advisor Colleenia was able to secure him an offer for coverage at Standard rates on a term 10 product, without any increase in premiums due to impaired health. Colleenia is encouraging him to accept the offer, since it’s unlikely he will get Standard rates elsewhere. Cost is only somewhat of an issue now but he plans to make more money in future years. If Kartik needs the insurance to stay in force until age 65, what is the most appropriate product for Colleenia to recommend?
a) Renewable term 10 insurance with guaranteed rates
b) Non-renewable term 10 insurance with re-entry provision
c) Renewable and convertible term 20 insurance
d) Re-entry term 10 insurance with adjustable rates
Since it’s likely that Kartik will not be able to obtain favourable life insurance rates in the future, Colleenia should recommend the renewable term 10 product with guaranteed rates. This will allow Kartik to have lower premiums than any term 20, and will allow him to lock in future premiums without requiring underwriting later. Re-entry policies are appropriate only for people who anticipate continued good health which is not the case in Kartik’s situation.
[Ref: 2.5.1]
Jeremy has a participating whole life policy with a cash dividend option. This year’s annual dividend amount is $10,000 and his policy’s adjusted cost base (ACB) is $4,000.
What will be Jeremy’s policy gain from the policy dividend?
a) $10,000
b) $6,000
c) $4,000
d) $0
Because the policy dividend is paid to Jeremy, the policy gain is equal to the amount of the dividend minus the policy’s adjusted cost base (ACB). In this case:
Policy dividend =
$10,000 − $4,000 = $6,000
If the dividend would have been used to purchase additional insurance (such as with a paid-up additions (PUA) dividend option), there would not have been any policy gains resulting from the dividend.
(Refer to Section 7.2)
Julia owns a $1,000,000 whole life insurance policy with her son, Ron, named as the beneficiary. Five years ago, she took a policy loan of $200,000 against the policy’s cash surrender value, with an interest rate of 3.5% compounded annually. She has not paid back the loan or paid any interest over the past five years. If she dies today, what will be the amount of death benefit paid to Ron?
a) $762,463
b) $975,456
c) $687,900
d) $835,642
The death benefit paid to Ron will be $762,463. The $1,000,000 coverage will be reduced by $237,537, calculated as:
$237,537 = $200,000 × 1.035 (Year 1) × 1.035 (Year 2) × 1.035 (Year 3) × 1.035 (Year 4) × 1.035 (Year 5)
or
$200,000 × (1 + 0.035)5
This is the original policy loan plus compound interest calculated as:
Year 1: $200,000 + (3.5% × $200,000) = $207,000
Year 2: $207,000 + (3.5% × $207,000) = $214,245
Year 3: $214,245 + (3.5% × $214,245) = $221,743.58
Year 4: $221,743.58 + (3.5% × $221,743.58) = $229,504.61
Year 5: $229,504.61 + (3.5% × $229,504.61) = $237,537.27
As a result, her beneficiary would receive $762,463 calculated as:
$1,000,000 – $237,537
[Reference: 12.10.7]
Samir and Vadim each own 50% of the 300 shares of Sadim Inc., an electronics company. They have implemented a cross-purchase buy-sell agreement funded by insurance owned by Sadim Inc. In this case, which of the following outcomes can be expected?
a) If Vadim dies, Samir pays Vadim’s estate for his 150 shares with a promissory note.
b) Samir and Vadim pay the premiums for life insurance on each other.
c) If Samir dies, the insurance company pays the tax-free death benefit to Vadim.
d) If either of them dies, the insurance company pays a taxable death benefit to Sadim Inc.
If a cross-purchase agreement is funded by corporate-owned insurance, usually the corporation is named as the beneficiary of the policy. The insurance company will pay the death benefit to the corporation, which will credit the amount to its capital dividend account. When one of the shareholders dies, the surviving owner(s) purchase the shares from his estate, often using a promissory note. Hence, if Vadim dies, Samir pays Vadim’s estate for his 150 shares with a promissory note.
[Ref: 8.4.4.2]
Zaheer owns a $350,000 10-year term renewable policy which he bought when he was 40. His annual premiums were $620 so far and as per the guaranteed renewal rates in the contract he will be paying $2,400 after the 10th year, which is in a few weeks. Assuming he is still in good health, which of the following is most likely to benefit Zaheer financially?
a) Zaheer should continue with his existing insurance policy as the premium rate upon renewal is always modified to reflect the health of the life insured at the time of renewal.
b) Zaheer will benefit from a new insurance policy with similar term and coverage as it is likely to have lesser premiums.
c) Zaheer should continue with his existing insurance policy as the premiums of a new policy are likely to be significantly higher due to his increased age.
d) Zaheer is likely to benefit from a new insurance policy only if it excludes the incontestability period and suicide clauses
Zaheer, being in good health, will benefit from a new insurance policy with similar term and coverage as it is likely to have lesser premiums. The guaranteed rates upon renewal may be significantly higher than the rates being offered on new policies with the same term, particularly if the life insured is in excellent health.
[Ref: 12.3
Paul has a whole life policy with a cash surrender value (CSV) of $50,000 and an adjusted cost base (ACB) of $15,000. He pays the $2,800 premium annually. His next premium is due in nine months. Paul has decided to cancel his policy effective immediately and has informed his insurer in a signed letter.
How much money will Paul receive from the insurer for the policy cancellation?
a) $50,800
b) $51,400
c) $52,100
d) $53,600
Upon cancellation of his policy, Paul will receive the cash surrender value of $50,000 plus the prorated portion of the premiums he paid three months ago for the whole year. Since he cancelled his policy three months after paying a premium that covered him for 12 months, he will receive a refund for the nine months remaining before his next premium was due. This is calculated as:
9/12 × $2,800 = $2,100
So Paul will receive $50,000 + $2,100 = $52,100.
(Refer to Section 12.5)
A few years ago, Ann took out a $50,000 policy loan on her whole life insurance policy to start a business. At that time, the policy’s ACB was $40,000 and the CSV was $70,000. Today, she wants to repay $20,000 of the loan.
How much of her repayment will she be able to deduct for income tax purposes?
a) $5,000
b) $10,000
c) $15,000
d) $20,000
When Ann took out her $50,000 policy loan, it resulted in a policy gain of $10,000 ($50,000 - $40,000), which was fully taxable.
When a policyholder repays the policy loan in part or in full, they can deduct the repayment from their taxable income, up to the amount of the policy gain she had to report when she took out the loan. By repaying $20,000, Ann is able to deduct a maximum of $10,000, which was the amount of the policy gain when she took out the loan.
(Refer to Section 7.5.1)
